Dollar keeps dropping as deficit worries grow

The enfeebled dollar limped to a new lifetime low against the euro on Friday on news of a much smaller than expected recovery in US employment during December.

The single European currency surged to US$1.2856 against US$1.2761 late on Thursday in New York.

The dollar stood at ¥106.50 from ¥106.21 on Thursday.

The rally sent the euro smashing through its previous all-time record of US$1.2811 set on Tuesday to a new high of US$1.2872.

Disappointment

The move came after the US Department of Labor reported that the US economy generated just 1,000 new jobs in December, against economists' forecasts of a 148,000 rise.

While payroll growth disappointed, the US unemployment rate actually shrank last month to 5.7 percent from 5.9 percent in November.

But this came about because thousands left the job market.

"The market has very much gone with the weaker number," noted Steven Saywell, senior currency strategist at Citigroup.

While US officials have pointed to strong fundamentals in favor of faster economic growth, this report clearly showed that not all factors are lining up behind a strong year, said Paul Mackell at ABN Amro.

The report "caught the market off-guard a little bit, and that's why we saw the dollar tumble against major currencies," he said.

US interest rates are substantially lower than those in the euro area and Britain, with the US Federal funds rate standing at 1.0 percent, against the European Central Bank's benchmark refi rate of 2.0 percent.

This makes euro area assets relatively more attractive, and US assets less attractive.

It is especially important at a time when the US government has to attract roughly US$1.5 billion a day to finance its current account deficit.

Citigroup's Saywell said that, with the US job market staying soft, the US Federal Reserve is unlikely to hike interest rates anytime soon, and this weighed on the dollar.

He noted that the euro's big run-up over the past month had come at the same time that financial markets have reduced their expectations of Fed rising interest rates.

Perspective

It will take a change in Fed tightening expectations to help turn the dollar around from a fundamental perspective, Say-well said.

While technical corrections could come about, the dollar is likely to remain "fairly weak" for the next three months, he said.

The euro was changing hands at US$1.2856 from US$1.2761 late on Thursday in New York, ¥136.87 (¥135.53), £0.6957 (£0.6961) and 1.5667 Swiss francs (Sf1.5651).